This was shaping up to be a big week on Wall Street. The election in Greece had the potential to create some resolution for the European Union and it was widely believed that the Federal Reserve Open Market Committee would begin a third round of Quantitative Easing (code for money printing operations).
Instead the Greeks opted for a party that promises to stay in the Euro in exchange for more money from its neighbors accompanied by less budget tightening. This action simply kicks the can further down the road and will make the Germans even more incredulous.
The Fed with their modest extension of Operation Twist despite lower economic forecasts and raised levels of jawboning looks more and more like they are out of bullets. It's the old "actions speak louder than words" in this instance that makes me believe that if they had the cards in their hand they would play them now in light of our ever weakening economy.
The biggest reality that I find hard to understand is why so many people believe that a further creation of money (read debt) is going to solve our global debt problem. Central bankers and governments around the world have already thrown more than $10 Trillion collectively at the economy and what do we have to show for it?
Europe is undoubtedly in a recession. The Chinese Purchasing Managers Index fell again marking the eighth straight month of contraction. The economic news here at home is nothing short of unremarkable. Last week's Fed announcement that Americans are 40% poorer than they were five years ago and their net worth is approximately the same as it was in 1992 was staggering. I somehow think either most Americans either missed that news or are refusing to believe it because collectively we should be outraged.
The thought of solving a debt problem by creating more debt will long term never work. Individuals and governments must learn to live within their means. Until that happens the debt problem will only get bigger. It may be delayed, allowing for some nice trading opportunities but more debt is not the solution.
The markets have rallied off their lows from early in the month and in many cases have cleared some important resistance levels. The problem is markets have in that process become extremely overbought on a short term basis as measured by the NYSE McClellan Oscillator. We are currently at the same levels we were last year just prior to significant downturns in the market. This indicator has a very good long term track record of predicting short term market tops within a week or so. I expect a near term pullback perhaps to 1310 in the S&P 500. Should that level hold it may create a better time to enter trades for a late summer rally. If it doesn't hold then investors will have done well to avoid added risk at today's prices.
click to enlarge
The stock market has some positive trends going for it. First on a Price to Earnings ratio - stocks are historically undervalued. The dividend yield for many companies today is much more attractive than bond yields today. Finally the chance of catastrophic events occurring in Europe is off the table - at least for now. The predicted near term pullback should give both growth and income investors a better entry point in the near future.
Pacific Financial Planners and Jerry Slusiewicz held no positions mentioned in this article.